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World Economy - December 2016

Source: OPEC_RP161205 12/14/2016, Location: Europe

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Global growth remains unchanged for 2016 and 2017 at 2.9% and 3.1%, respectively. Better-than-expected 3Q16 GDP growth in the US and Japan lifted the 2016 OECD growth forecast from 1.6% to 1.7% – which is the same level as the unchanged forecast for 2017 growth. The 2016 forecast for major emerging economies also remains at the same level as in the previous month, while India’s growth forecast for 2017 was revised down slightly in anticipation of the expected somewhat negative impact from challenges arising from the announcement that the most circulated large bills would become invalid.

Russia and Brazil are forecast to move out of two years of recession in 2017 and to grow by 0.8% and 0.4%, respectively. As in other commodity producing economies, this outcome depends on commodity price levels. But recent developments in oil prices point at a positive trend. Meanwhile, China and India are forecast to expand at a slightly lower level in the next year, at 6.2% and 7.1%, respectively –compared to 2016 growth of 6.5% and 7.5% – however the level of growth remains encouraging.

Numerous uncertainties for global economic growth remain. Among these are policy issues across the globe, which bear considerable weight, as well as monetary policy decisions, which remain important in the near-term. It is expected that the US Federal Reserve (Fed) will raise interest rates in December, while the European Central Bank (ECB), the Bank of Japan (BoJ), the Bank of England (BoE) and the People’s Bank of China (PBoC) will all maintain more accommodative stances.

OECD
OECD Americas
US
3Q16 GDP growth was reported to be stronger in the second of three estimates at 3.2% q-o-q on a seasonally adjusted annualized rate (SAAR), compared to an already solid first estimate of 2.9%. The most important supportive factor was ongoing solid private household consumption, which rose by 2.8% SAAR. Moreover, private investment grew by 2.1% q-o-q SAAR while exports also supported GDP significantly, growing by 10.1% q-o-q SAAR. While low 1H16 growth has kept the year’s GDP growth below the 2% mark, the economy is forecast to fare better in 2017. This will certainly depend on the plans of the incoming Trump administration, which will determine if, and to what extent, the announcements made during the campaign will actually be implemented. It seems that some tax cuts are likely to materialise, while many other issues remain unclear. This could have potential implications for the Fed’s monetary policies.

While so far this year the subdued development of the US economy has kept the Fed from further raising interest rates, it now seems likely that a rate hike will materialise in December. The Fed indicated it will do so, when appropriate. With ongoing improvements in the labour market, stronger GDP growth and inflation once again rising, as well as a more resilient situation in the major emerging economies, the current situation may offer an appropriate scenario for action. Monetary policies will most probably become an important area to monitor in the coming months. While it seems that fiscal stimulus will become the driving force to achieve higher growth in the near-term, and with monetary policies being considered as becoming less effective, this might not entirely be the case. Monetary policies will probably not be the lifeline for growth in the US economy to the same extent, anymore. This could be positive as it would lower the dependence of past years on unprecedented monetary measures. However, the current scenario of an underlying trend of rising inflation, supported by a stabilisation in the oil market and inflation-enhancing stimulus measures, may lead to quicker-than-anticipated monetary tightening. This, in turn, could have numerous repercussions on economic growth in various economies – mainly emerging markets – as well as on foreign exchange markets. In general, the impact of monetary stimulus is expected to lessen, hence, liquidity is expected to fall and, consequently, market volatility to rise. The oil market may also be impacted in various dimensions of supply and demand.

The labour market continued to strengthen in the latest November readings. The unemployment rate fell back to 4.6% in November, the lowest level since 2007. This implies full employment. Although the quality of the labour market may probably need to be analysed more closely, it is a considerable achievement. Non-farm payroll additions were up by 178,000 in November, after a rise of 142,000 in October. Average hourly earnings remained slightly below past improvements, but increased at a solid rate of 2.5% y-o-y.

Developments in industrial production remain soft and it is mainly the services sector that is supporting the US economy. Industrial production declined by 0.9% y-o-y in October, after contracting 1.0% y-o-y in September. Mining, including oil sector-related output, fell considerably again, dropping by 7.0% in October, the lowest decline level within one year and a further indication that the downward trend seems to have turned. Moreover, some improvements are filtering through, as seen in manufacturing orders, which rose for the second consecutive month by 1.3% y-o-y in October, after a rise of 1.0% in September.

The positive trend in private household consumption from recent GDP numbers was supported considerably by the latest retail sales numbers. Retail sales growth in October stood at 4.3% y-o-y, even higher than the already strong September level of 3.2% y-o-y. This positive trend is also visible in the Conference Board’s Consumer Confidence Index, which increased strongly to a level of 107.1, the highest level since 2007. This is a strong indication that economic developments are improving.

July’s Purchasing Manager’s Index (PMI) for the manufacturing sector, as provided by the Institute of Supply Management (ISM), also indicated improvements in the underlying economy as it moved higher to reach 53.2 in November, compared to 51.9 in October. The very important services sector index moved to 57.2 from 54.8 in October.

Given the better-than-expected 3Q16 performance, the GDP growth forecast for 2016 was lifted from 1.5% to 1.6%. More data over the coming months will provide further insight to allow a more detailed review of the US economic situation, particularly after the plans of the incoming administration become available. The 2017 growth forecast of 2.1% remains unchanged and anticipates a better momentum in the coming year, and if the current trend continues some upside potential may materialise.

Canada
Some weakness remains in the Canadian economy, but with an improving US economy – Canada’s most important trading partner – and a stabilisation in oil markets, which could lead to rising growth. This turn has already materialised, as seen in a strong 3Q16 GDP growth number of 3.5% q-o-q SAAR. Also, growth in industrial production recovered significantly in September and rose by 3.4% y-o-y, after only 0.3% y-o-y only in August. Output from the mining, oil and gas sectors was the main driver with growth of 5.6% y-o-y in September. The PMI for manufacturing also improved and rose to 51.5 in November, after 51.1 in October. The GDP growth forecast remained unchanged at 1.2% for 2016. It already anticipates some improvements in 2017 with an unchanged growth rate of 1.7%. However, if the current trend continues, it may lead to an even stronger acceleration.

OECD Asia Pacific
Japan
The Japanese economy has started to improve slightly and it seems that global improvements in 2H16 have also materialised to some extent in Japan, although exports are still in considerable decline. Government actions and domestic improvements seem to have supported the growth momentum. Industrial production rose for three consecutive months, but exports have continued their decline. Some positive momentum was reflected in the most recent 3Q16 GDP release, which showed growth of 2.2% q-o-q SAAR. Amid a partially improving trend, the economy remains challenged by a variety of factors but primarily the ongoing decline in exports. Additional developments with regard to the Japanese yen will need close monitoring in this respect. Positively, and in line with the most recent improvements in the economy, the deflationary trend has turned and the efforts of the BoJ may have been supported by the stabilisation in oil prices.

Inflation turned positive in October for the first time since February. It stood at 0.2% y-o-y in October, but remains far below the 2% target of the BoJ, which it is still trying to achieve. Given the recent strengthening of oil prices and the impact of again rising inflation globally, this trend may continue. When excluding the two volatile groups of energy and food, the country’s core inflation figure stood also at 0.2% in October, compared to 0.1% in September. Real income continued to rise, but pay increases were at relatively low levels over the past two months, gaining 0.4% y-o-y in October and September, after reaching 0.5% y-o-y in August. The unemployment rate remained ultra-low in an extremely tight labour market, a factor that is expected to lead to continue rising income levels. In October, the unemployment rate stood at only 3.0%.

Japanese exports continued their declining trend. On a non-seasonally adjusted level, October’s exports fell again, down by 10.3% y-o-y, compared to a contraction of 6.9% y-o-y in September. Industrial production rose for the third month in a row, up by 0.3% y-o-y in October, after hitting 1.4% y-o-y in September and 1.1% y-o-y in August. This positive trend came after 13 months of declines. However, a negative trend in manufacturing orders indicates that further challenges in the production sector lie ahead. Manufacturing orders dropped by 9.3% y-o-y in September, after seeing a decline of 4.0% y-o-y in August. The challenging environment has also been reflected in domestic demand. Retail trade remained negative and declined again by 0.1% y-o-y. But this area of the economy is at least also showing some improvements, as this rate of decline compares to a contraction of around 2%, on average, in the previous two months.

The latest PMI numbers provided by IHS Markit also confirmed the slight ongoing improvements. The PMI for manufacturing remained almost unchanged at 51.3 in November, only slightly lower than the 51.4 seen in October and after having reached a level of only 50.4 in September. The services sector PMI also improved to stand above the growth-indicating level of 50 for a second consecutive month, rising to 51.8 from 50.5 in October.

By considering the stronger-than-expected 3Q16 GDP growth number, the 2016 GDP growth forecast was revised up to 0.8%, from 0.7%. The 2017 growth forecast foresees a slightly better momentum at growth of 0.9%, unchanged from the previous month. Numerous challenges remain and it remains to be seen to what extent the current improvements in the global economy and the ongoing stimulus measures will be able to lift growth above current forecast levels.

South Korea
The situation in the South Korean economy remains mainly challenged by the latest political turbulences, but, unaffected by these domestic issues, exports turned significantly positive in November, when they grew by 3.7% y-o-y, the highest growth rate in more than one year. Industrial production also rose 1.7% y-o-y in October. However, the latest PMI number for the manufacturing sector in November still indicates a declining momentum in the manufacturing sector. The index stood at 48.0, below the growth-indicating level of 50, at the same level as a month earlier. While near-term developments warrant close monitoring, the GDP growth forecast for this month remains unchanged at 2.6% for 2016 and 2.5% for 2017.

OECD Europe
Euro-zone
The economic situation in the Euro-zone continues to improve slightly. Germany and, to some extent, France remain the countries that are most supporting the recovery trend. But Spain and some peripheral economies are also enjoying a rebound from the low levels seen in past years. However, the latest data from France and Germany was mixed, and Italy, Greece and Portugal are also not doing as well. Moreover, the ECB has decided to reduce its monetary stimulus, while clearly underscoring that it will continue quantitative easing, at least for the time being. The bank confirmed that it would buy 80 billion in bonds per month until March, but added it would prolong its asset purchases until the end of 2017 at the lower rate of 60 billion. Moreover, the unemployment rate has remained below 10% now for two consecutive months. Also, banking sector-related weakness seems to have abated to some extent, while in Italy concerns about the sector have risen again, after the government’s defeat in the most recent referendum about proposed constitutional changes, which led to the resignation of the Prime Minister.

Positively, 3Q16 GDP growth was better than expected at 0.4% q-o-q seasonally adjusted growth rate. This is up from 2Q16, when growth stood at 0.3% and only slightly below the 0.5% reached in 1Q16. Current estimates for 4Q16 are below these levels, given the most recent mixed data. In the next year, uncertainties are seen as prevailing, both economically and politically. Next year’s federal government elections in France and Germany will be important in the political debate. The latest referendum on the constitution in Italy has again highlighted that the Euro-zone is in a fragile state in terms of its political development.

The latest industrial production figures were volatile to some extent, but have again recently offered confirmation that the business environment has improved. After a decline of 0.4% y-o-y in July, growth again rose to 2.3% y-o-y in August and 1.3% y-o-y in September. Manufacturing growth stood at a firm 1.4% in September, after rising by 2.7% y-o-y in August, while considerable support came again from mining and quarrying, with a rise of 7.2% y-o-y, after a 2.3% y-o-y rise in August. Retail sales growth in value terms increased as well by 2.4% in October, after a rise of 1.0% in September and August, signalling an improvement in the underlying economy. Some support may still come from slight improvements in the labour market. The unemployment rate in the Euro-zone continued to decline and remained below the 10.0% mark after having stood at 9.8% in October.

After the latest rounds of ECB stimulus, inflation remained low, but increased to a more considerable level, rising by 0.6% y-o-y in November after reaching 0.5% y-o-y in October. Core inflation – the CPI (excluding energy, tobacco and food) ? stood at 0.8% y-o-y, the same as the previous three months. Among other reasons, this explains why the ECB has reduced its monetary stimulus programme. Moreover, the effectiveness of monetary stimulus has lately increased again. Credit supply figures in October stood at 1.3% y-o-y and 1.2% y-o-y in September, recovering from levels below 1% year-todate up to September.

The latest PMI indicators point to a continuation in Euro-zone improvements. The manufacturing PMI for November stood at 53.7, after October’s level of 53.5. The important services PMI increased to 53.8 in November, after reaching 52.8 in October.

While the recovery in the Euro-zone is ongoing, multiple challenges remain. With this trend having been anticipated already, the GDP growth forecast numbers remain unchanged at 1.6% for 2016 and 1.3% in 2017. This lower level of growth in the coming year anticipates challenges from political developments in 2017, given key elections in France and Germany, as well as the uncertainty surrounding Brexit procedures, all of which may lead to rising uncertainty. This is to be seen in combination with some likelihood of rising inflation and, hence, a potential reduction in monetary stimulus.

UK
While the UK government has gained some clarity lately about the potential timeline of the Brexit negotiations, the procedure, content and certainly the form of the outcome remain widely unclear. This uncertainty will remain an issue for the coming months and is expected to negatively impact the economic development of the UK. Importantly, parliament has recently voted for the Brexit and endorsed the March timeline to start negotiations, hence triggering Article 50. There is still the ruling of the Supreme Court, which has to decide on the formal involvement of parliament in the negotiations. This is crucial, as the most recent vote by the House of Commons was a non-binding motion by the Labour Party. It is expected that the Supreme Court will finalise its ruling by January. If the government appeal is rejected, the Prime Minister will likely present a short bill to approve Article 50, which will have to pass through the House of Commons and the House of Lords with more room for debate. This will likely only be passed with some delays and amendments, and while it seems that the March deadline may be met, such an outcome could create further uncertainty. Most importantly, parliament will likely demand more transparency about the negotiation strategy, an element that the government does not want to provide, given its obvious sensitivity. Finally, the procedures for Scotland remain unclear.

Given the latest developments, a so-called “hard exit” – contrary to a “soft exit” ? still seems more likely. A hard exit would require the UK to renegotiate most of its trade agreements. While the latest performance of the UK’s economy remained strong up to now, the trend is likely to taper off as the negative implications of Brexit seem to slowly filter through to the economy.

The PMI for manufacturing remained at a solid level in November of 53.4. But this is 1 index point below the October level of 54.2 and below the 55.4 of September. Positively, and more importantly for UK economic growth, the services sector PMI rose to 55.2 from 54.5 in October. However, the momentum in industrial production turned significantly negative in October, falling by 1.2% y-o-y, the largest decline since September 2013. Domestic consumption held up very well as retail values increased by 6.6% in October, after an already strong rise of 2.9% y-o-y in September and 4.4% y-o-y increase in August. This better-than-expected post-Brexit development has led to an again slightly upward revision in growth estimates for 2016. The forecast for 2016 has been revised up to 1.9% from 1.8%, while growth expectations for 2017 remain at 0.8%. However, the underlying assumption of a severe negative impact from Brexit on the UK economy in the short-term has not changed.

Emerging and Developing Economies
In Brazil, GDP contracted by 2.9% y-o-y in 3Q16 following declines of 5.4% and 3.6%, respectively, in 1Q16 and 2Q16. The slowing pace of private consumption – which accounts for nearly 65% of the GDP – was the main driver of this diminished contraction in GDP. The latest contraction in GDP during 3Q16 largely confirms the expected deceleration of 3.4% in 2016, while the slow upward trend also supports the anticipation of minor cyclical growth of 0.4% in 2017.

In Russia, a minor GDP contraction of 0.4% y-o-y in 3Q16 represents a continuation of an upward trend seen since the beginning of this year. This supports expectations of a much lower contraction in 2016 compared to 2015. Furthermore, strong performance by the private sector (services and manufacturing) holds promise for growth prospects in the coming couple of months, supporting an outlook of a return to GDP growth in 2017.

India’s GDP growth rate in 3Q16 was 7.3%. It seems that in the short-term, the process of demonetisation has had a sharply negative effect on economic growth. On the positive side, a top EU official said investors from European countries are now bringing "white clean money" to India and suggested there was a need to resume talks on the EU-India Broad-based Trade and Investment Agreement (BTIA), popularly known as a free trade agreement. India's demand-side real GDP grew at 7.3% y-o-y during 3Q16, which was strong enough to support a fast-growing GDP. The supplyside measure of GDP showed a clear loss of momentum, with real growth slowing to 7.1% y-o-y from the 2Q16 7.3% y-o-y. As a result of the slowdown in private consumption and a likely further contraction in fixed investment, economic growth expectations have been reduced from 7.2% to 7.1% in 2017.

China’s economy continued to improve in November, although it lost some momentum compared to the previous month. In real terms, Chinese investment and retail sales growth slowed in October while industry was stable, indicating a slightly slower start to the 4Q16. Inventory and employment data also showed the basis for growth is not yet solid and investors have to remain vigilant about the risk of a downturn in the coming months. The overall momentum of economic growth remained reasonable in October and November, with the momentum of Fixed Asset investment (FAI) picking up and supported by still strong real estate activity, as well as fast infrastructure investment growth. But FAI in manufacturing slowed down again in October, having accelerated in September, and remains close to its average pace in 3Q16. The outcome of the US election has created more uncertainties and challenges for China, particularly through trade channels and the export outlook, given the potential for a shift in US policy on free trade.

Brazil
The GDP of Brazil contracted by 2.9% y-o-y in 3Q16 following declines of 5.4% and 3.6%, respectively, in 1Q16 and 2Q16. A reduced slowdown in private consumption, which accounts for nearly 65% of GDP, was the main driver of this diminished contraction in GDP. Private consumption declined 3.4% y-o-y in 3Q16, compared with 5.8% and 4.8%, respectively, in the first two quarters. In contrast, government consumption decreased by 0.8% y-o-y, faster than the 0.5% y-o-y drop in the previous quarter. Changes in trade, while remaining supportive to growth, showed a lower increase in exports and less of a decrease in imports, compared to several previous quarters. Inflation in Brazil dropped to 7.4% y-o-y in November, down from 8.5% a month earlier, and continued its slow deceleration. At the beginning of the year, inflation stood at 11.3%. Reflecting this slow easing in inflation, the central bank lowered its benchmark interest rate from 14.25% to 14.00% in October and to 13.73% early this month. The consumer confidence index dropped in November to 80.9 from 84.4 a month earlier, affected by pressures on the currency and continued political uncertainty in the country. The real depreciated by 4.9% m-o-m vs. the US dollar in November. The unemployment rate remained at a record high of 11.8% in October.

The severe manufacturing sector recession persisted in November with the IHS Markit manufacturing PMI now in contraction territory for 22 months in a row. The index posted 46.2 last month vs. 46.3 in October. Declines in production, new business and employment weighed on the sector.

The latest contraction in GDP during 3Q16 largely confirmed expectations of a deceleration of 3.4% in 2016, while the slow upward trend also supported the anticipation of minor cyclical growth of 0.4% in 2017.

Russia
The economic deceleration continued in 3Q16, though at a rate that only confirms the clear upward trend towards growth territory. GDP contracted by 0.4% y-o-y in 3Q16, its smallest rate of contraction since the onset of the current recession in 1Q15. Details on the components of GDP have not yet been published.

The downward trend of inflation continued in November with inflation posting 5.8%, its slowest rate of increase since January 2014. Following a 3% m-o-m appreciation in October, the ruble depreciated by 2.6% m-o-m in November. At the same time, the benchmark interest rate was kept unchanged at 10.0% by the central bank.

The IHS Markit Russia manufacturing PMI showed a strong reading in November, registering its highest level in 68 months. The index was supported by marked growth in production and new orders to post 53.6, up slightly from 52.4 in the previous month. Industrial production decreased by only 0.2% y-o-y in October and is expected to largely return to growth territory in the coming months. The services sector is also accelerating, with November’s reading of the PMI at a four-month-high of 54.7. This has helped the composite output index to reach a four-year high of 55.8. The survey showed strong growth in new orders which led to faster build-up in backlogs. Retail trade/sales declined by 4.4% y-o-y in October and are likely to continue moving towards growth in 2017.

The minor GDP contraction of 0.4% y-o-y in 3Q16 represents a continuation of an upward trend seen since the beginning of this year, which supports expectations of a much slower contraction in 2016 compared to 2015. Furthermore, strong performance by the private sector – services and manufacturing – holds promising prospects for growth in the coming couple of months, backing the outlook of a return to GDP growth in 2017.

India
India’s economy has seen a marginal acceleration in growth in 3Q16, registering 7.3%. In comparison, GDP growth expanded by 7.1% in 2Q16 and at 7.6% in 1Q16. India's demand-side GDP grew at 7.3% y-o-y during 3Q16, which was strong enough to support the fast-growing GDP.

Private demand offers the greatest hope for a return to stronger growth. Also, a reasonable summer monsoon season has supported rural household spending. It seems the recovery in private consumption was insufficient for offsetting the deepening contraction in real fixed investment, which fell for the third consecutive quarter, down about 5.6% y-o-y. In addition, weak capacity utilisation and difficult access to finance sources have continued to weigh on the investment decisions of businesses, while any additional boost to public investment has hit budgetary constraints.

The supply-side measure of GDP showed a loss of momentum, with real growth slowing to 7.1% y-o-y from 2Q16, when it was 7.3% y-o-y and consistent with the demand-side.

Agriculture showed a recovery for the first time in two years. The only other positive spot on the supply side was faster growth in construction, which was up 3.5% y-o-y following a 1.5% y-o-y expansion in 2Q16, supported by ongoing infrastructure projects such as railroads, as well as a slight gain in real estate activity following new rules for quicker settlements of housing disputes adopted in August. The rest of industrial sector activity has been weak since the June quarter, with mining and quarrying sliding further into contraction.

In terms of inflation, India's CPI decreased to 4.20% y-o-y in October from 4.39% y-o-y a month earlier. It was the lowest inflation rate since September 2015, as food costs rose at a slower pace. Also, WPI decreased to 3.53% y-o-y in October from 3.66% y-o-y in the previous month.

The trade deficit in India widened 4% y-o-y to $10.2 billion in October. Exports went up 9.6% to $23.5 billion, the highest level since March 2015. Imports increased 8.1% to $33.7 billion, the highest level since August last year. Gold purchases jumped 108.4% to $3.5 billion and oil imports increased 3.98% to $7.14 billion in October.

The Reserve Bank of India (RBI) followed the Indian government’s decision on 8 November for a crackdown on ‘black’, or unaccounted-for, money and replaced old INR 500 and INR 1,000 notes. It also imposed an incremental cash reserve ratio, protecting Indian bank liquidity against expected future withdrawals. Citing a "surge in deposits" and "large excess liquidity in the system" because of India's ongoing exchange of banknotes, the RBI on 26 November introduced an incremental cash reserve ratio of 100% to be applied to the increase in deposits between 16 September and 11 November. Ahead of its monetary policy review scheduled for 9 December (and the next review of this ratio), the RBI has asked banks to deposit these funds with it for two weeks beginning 26 November as a "purely temporary measure", while the standard cash reserve ratio remains at 4%. The incremental cash reserve ratio is designed to absorb surplus liquidity arising from the return of physical cash to the banking system and will not earn interest. The demonetisation of INR 500 and INR 1,000 bills has led to a large increase of deposits, which has boosted the liquidity of banks temporarily. However, it seems in the short-term that the effect of this on economic growth could be sharply negative, owing in part to the poor implementation of the demonetisation process.

Fiscal policy will most likely become more expansionary as the government finds more space for spending, given an expected increase in tax collection, as some undisclosed income is expected to be declared following the demonetization process. Monetary policy is also likely to remain expansionary, with as much as 50 basis points (bp) in policy rate cuts still anticipated before April 2017. A reduction in the amount of currency in circulation and weaker domestic demand are seen further easing inflation, which could open more room for policy easing. A temporary hike in bank liquidity could also drive short-term interest rates down, helping to revive credit growth. However, the outlook for monetary policy involves significantly more risk. The reasons behind the RBI’s further monetary policy actions are:
- Growing pressure on the Indian rupee, following the strengthening of the US dollar after the US presidential election and the anticipated interest rate hikes by the US Federal Reserve, which could make it more difficult for the RBI to cut rates for much longer.
-The RBI's own behaviour appears to have become less predictable in September, with the bank arguably delaying actions and providing an inconsistent response to the effects of demonetisation on banks, all of which calls its future actions into question.

November’s data highlighted an eleventh consecutive month of improvements in manufacturing conditions across India, with the country’s PMI registering 52.3. However, down from October’s 22-month high of 54.4, the latest reading pointed to a modest overall upturn. PMI data for November showed that the sudden withdrawal of high-value banknotes in India caused problems for manufacturers, as cash shortages hampered growth of new work, buying activity and production. However, whereas some may have anticipated an outright downturn, the sector held its ground and remained in an expansionary mode.

GDP growth expectations for 2016 have been kept unchanged at 7.5%. But given some downward pressures, such as a slowdown in private consumption and a likely further contraction in fixed investment, growth expectations have been reduced from 7.2% to 7.1% for 2017.

China
China’s overall economic growth momentum remained reasonable in both October and November, with FAI momentum picking up and supported by still-strong real estate activity, as well as fast infrastructure investment growth. FAI in manufacturing slowed again in October, having accelerated a month earlier, but remains close to its average pace in 3Q16. While the growth in housing sales slowed last month, following housing purchase restrictions introduced by local governments in more than 20 cities in early October, housing starts picked up. With construction on existing projects picking up the pace as well, real estate FAI growth rose further. However, it seems the GDP growth outlook for next year is more uncertain. FAI growth accelerated for a second month, but remains well below growth rates considered ‘slow’ only a year ago. It must be stressed that the slightly faster growth in headline FAI is entirely due to faster investment growth in services, while industrial and construction sector investments continue to slow. Within the secondary sector, mining investment continued to contract by 20.9%, while manufacturing investment was unchanged at 3.1% and utilities investment slowed to 13.9% (from 16.1% last month). Initial data indicates that the utilities investment slowdown has been concentrated in power and heat supply. Lastly, construction sector investment growth slowed even further from a flat 0% in September to a 5% decline in October.

The recent US election has created more uncertainties and challenges for China, particularly from trade channels and the export outlook, given a shift in US policy on free trade. Meanwhile, a sharply strengthening US dollar is putting pressure on the yuan and could accelerate foreign exchange capital outflows. In real terms, Chinese investment and retail sales growth slowed in October, while industry was stable, indicating a slightly slower start to 4Q16.

In terms of foreign investment, China intends to attract such flows to support GDP growth next year. For this reason, China's Ministry of Finance relaxed its norms for foreign investments flowing into the country's free trade zones (FTZs). Until now, foreign investment had been restricted to four initial FTZs. The relaxation of rules in FTZs for manufacturing activities is likely to represent a precursor to the extension of such rules’ relaxation to the higher value-added services sector. The government has committed to encouraging economic diversification to this sector.

Aggregate financing only totalled CN¥896.3 billion in October, compared with a 12- month average of CN¥1.4 trillion or a September level of CN¥1.7 trillion. One of the primary reasons for the decline in lending in recent months was related to lower Chinese yuan-denominated loan issuance, although most categories experienced lower flows of net new financing compared with the prior month. A three-month moving average of new financing growth rose to 34.7% y-o-y, a seven-month high, while broad money supply growth accelerated to 11.6%, a four-month high. In the first case, this primarily reflected a weak base in the prior year, rather than particularly high lending levels in October. Aggregate financing only totalled CN¥896.3 billion in October, compared with a 12-month average of CN¥1.4 trillion or a September level of CN¥1.7 trillion.

China's CPI rose 2.1% y-o-y in October of 2016, compared to a 1.9% rise in September, which was in line with market expectations. It was the highest inflation rate since April, as the politically sensitive food prices category increased by 3.7%, while non-food costs rose at a slower 1.7 %. The PPI accelerated further in October, rising by 1.2% y-o-y compared to an increase of 0.1% in September, in large part driven by gains in the prices of steel and coal. Rising output prices in industry will continue to boost nominal sales revenue and profit growth, and reduce the need of industrial enterprises for external financing. The average prices of new homes in 70 Chinese cities went up 12.3% y-o-y in October of 2016, compared to an 11.2% rise in September. It was the 13th straight monthly gain and the fastest rise on record.

China’s trade surplus was $45 billion in November of 2016, compared to a surplus of $54 billion a year earlier. In November, exports increased 10.7% y-o-y to $197 billion, following a drop in October. Imports increased by 17.8% to $152 billion, compared to a 9.4% fall in October.

The Caixin China General Manufacturing PMI came in at 50.9 in November, down from October's 51.2. It marked the second-highest reading in two years, indicating that the manufacturing industry has continued to pick up steam. The health of the sector has now strengthened in each of the past three months, which marks the longest period of improvement since late-2014. Chinese manufacturers noted a further rise in production volumes during November, stretching the current sequence of expansion to five months.

Under headline stability, mining sector output fell back into contraction, while overall manufacturing and utilities output grew at a slightly faster pace. Initial data indicates that overall light manufacturing output was stable. Meanwhile, the heavy manufacturing sectors remained stable and improved slightly, while industrial production was unchanged in October, expanding by 6.1%.

OPEC Member Countries
The economy of Saudi Arabia expanded 1.4% y-o-y in 2Q16 with the gross value added in the oil sector growing 1.6% y-o-y and in the non-oil sector rising 0.4% y-o-y, according to the Saudi General Authority for Statistics. The long series of growth in the country’s non-oil private sector gained more strength in November, with the Emirates NBD Saudi Arabia PMI increasing to 55.0, up from 53.2 in October. Faster growth in new orders and output, which have led to an increase in purchasing activity, all supported the sector.

In Algeria, GDP grew by 3.4% y-o-y in 2Q16. According to the Office National des Statistiques, the real economy grew by 4.0%, while the “non-productive economy” increased by 3.5%. Agriculture, forestry and fishing sector expanded by 5.3% in 2Q16, up from 4.8% in 1Q16.

The economy of Indonesia grew 5.0% y-o-y in 3Q16. Private consumption expenditure rose 5.0% y-o-y, while general government consumption expenditure dropped by nearly 3.0% y-o-y. The exports of goods and services fell by 6.0% and imports also declined 3.9%. Floods in parts of Indonesia, which disrupted supply chains, were largely responsible for the manufacturing sector remaining in contraction last month, according to the Nikkei Indonesia manufacturing PMI.

Following two consecutive quarters of contraction, the economy of Nigeria shrank by 2.3% y-o-y in 3Q16, according to the country’s National Bureau of Statistics. The Stanbic IBTC Bank Nigeria PMI highlighted that contraction in the private sector eased somewhat in November on renewed growth of new orders received.

In the UAE, the non-oil private sector witnessed the fastest increase in new business since August, which supported the PMI reading for November. The index increased to 54.2 in November, up from 53.3 in October. Price discounting and other marketing initiatives were reported as drivers behind higher new orders received.

Other Asia
In Malaysia, growth in GDP increased to 4.3% y-o-y in 3Q16, up from 4.0% in the previous quarter. A sharp deceleration in government expenditure growth from 6.5% in 2Q16 to 3.1% in 3Q16 was reported alongside slower growth of only 2.0% in gross fixed capital formation (GFCF) in 3Q16 compared to 6.1% in 2Q16. In contrast, net exports rebounded from a 7.0% y-o-y decline in 2Q16 to growth of 6.0% in 3Q16.

In the Philippines, GDP accelerated 7.1% y-o-y in 3Q16, compared to the 7.0% increase in the previous quarter. Growth in government consumption expenditure fell sharply from 13.5% y-o-y in 2Q16 to only 3.1% in 3Q16. Growth in private consumption was slightly lower in 3Q16 at 7.3% from 7.4% in the previous quarter.

In Thailand, GDP grew 3.2% y-o-y in 3Q16. Government expenditures slumped by 5.8% y-o-y, while private consumption increased by 3.5%. Meanwhile, GFCF rose by 1.4% and exports increased by 3.4%.

Africa
The economy of Egypt grew by a robust pace in 2Q16. GDP expanded 4.5% y-o-y in 2Q16, following the 3.7% expansion in the previous quarter. While reported growth in the private sector slowed from 5.0% in 1Q16 to 1.7% in 2Q16, public sector consumption, climbed by 4.8% y-o-y, up from the 2.0% growth seen in the previous quarter. While the decline in exports continued, it eased to only 2.4% y-o-y from the 18.7% drop in 2Q16. Following four quarters of contraction, imports rose 6.9% y-o-y.

The GDP of South Africa expanded by a slightly faster pace of 1.4% in 3Q16, compared to a rise of 1.3% in 2Q16. Growth in private consumption expenditure accelerated to 1.1%, up from 0.8%. Growth in public consumption expenditure slowed to 1.1% from 1.5% and the decline in GFCF deepened even further to register a fall of 6.1% in 3Q16 from the 3.0% drop in the previous quarter. As for exports, they declined for the first time since 1Q13, dropping by 3.9% in 3Q16 from the same period last year. Imports by South Africa declined in 3Q16 for the third consecutive quarter.

Latin America
The GDP of Argentina dropped by 3.4% y-o-y in 2Q16 after posting minor growth of 0.4% in the previous quarter. While private consumption decreased by 0.1%, government expenditure showed a sharp drop of 2.0% y-o-y in 2Q16 from the growth of 2.6% reported in the previous quarter. The downward trend in GFCF continued for the second quarter in a row in 2Q16. Exports were also 1.9% less in 2Q16 y-o-y compared to the same period last year, whereas imports continued to grow, though at a notably slower pace of 8.7% compared to 12.6% in 1Q16.

Transition region
Growth in the economy of the Czech Republic slowed in 3Q16 to 1.6% y-o-y from 3.6% y-o-y in 2Q16. This came on the back of slower growth in household consumption (2.7% y-o-y), government consumption (1.6% y-o-y), GFCF (-2.8%) and exports (1.1% y-o-y).

In Hungary, GDP increased by 2.2% y-o-y in 3Q16, which was lower than the previous quarter’s 2.8%. Collective government consumption posted a drop of 1.6% y-o-y, compared to the 6.2% growth seen in 2Q16, whereas that of households continued to grow albeit at a slower pace than in the previous quarter. Although the rate of contraction remained sizable, GFCF showed a notably slower rate of contraction in 3Q16 with 8.8% compared to the 19.7% decrease seen in 2Q16.

Oil prices, US dollar and inflation
The US dollar jumped in November against major currencies with the exception of the British pound sterling. On average, the US dollar gained 3.7% against the Japanese yen, and has increased against it by 6.1% in the last three months. The dollar gained 1.9% against the Euro in November and rose against the Swiss franc by 0.6%. In contrast, the dollar declined by 0.7% against the pound sterling due to better-thanexpected economic performance since the Brexit referendum, while uncertainty remains regarding Brexit negotiations between the UK and the EU.

Compared with the Chinese yuan, the US dollar rose by 1.4% m-o-m on average in November, its third consecutive monthly increase. It increased by 1.3% m-o-m against the Indian rupee, its largest advance since February. Compared with the Brazilian real, the US dollar increased by 4.9% m-o-m on average and by 2.6% against the Russian ruble.

Against the currencies of the other NAFTA trading partners (Canada and Mexico), the US dollar on average ended up by 5.3% against the Mexican peso, but recovered some ground from the lows seen in the days that followed the US presidential election – partly on the uncertainty of the outlook for trade relations with the US. The Central Bank of Mexico increased interest rates by 0.5% in order to tame inflationary pressures. Meanwhile, the US dollar advanced by 1.4% against the Canadian dollar.

The US dollar increases have mainly reflected expectations for higher interest rates in in view of further confirmation of the US economy’s strong performance in 3Q16, as well as continuing improvements in the labour market, and in anticipation of stimulus measures by the new US administration. At the same time, the central banks of the majority of currency counterparts are expected to remain accommodative. Market participants’ expectations for an interest rate hike at the upcoming meeting of the Fed further solidified during the month.

In nominal terms, the price of the OPEC Reference Basket (ORB) decreased by $4.65, or 9.7%, from $47.87/b in October $43.22/b in November. In real terms, after accounting for inflation and currency fluctuations, the ORB decreased to $29.99/b from $32.80/b (base June 2001=100). Over the same period, the US dollar advanced by 1.2% against the import-weighted modified Geneva I + US dollar basket*, while inflation decreased by 0.1%.

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